The economy is expected to grow more quickly than previously believed this year despite rising energy costs, a new report predicts.

The CBI also predicted that the rate of inflation will exceed its 2% target because of high power bills. But the business organisation argued against interest rate rises because energy prices were set to stabilise and domestic pressures would remain under control.

Improved exports would help manufacturing firms, while the service sector would continue to perform 'robustly', said the report.

CBI chief economic adviser Ian McCafferty said, 'The economy is now expected to grow slightly more quickly in 2006 than we previously thought, reflecting the better prospects for exports and greater government consumption.

'There will also be some of the long-desired rebalancing in the economy through 2006 as household consumption remains constrained and government spending slows relative to recent years, with growing export demand off-setting these factors.The trade-off between growth and inflation though worsens in 2007. Inflation, in consumer price terms, will stay above the 2% target to the end of 2007, although by the second half of the year it will ease back towards this level.'